Size no longer matters . . . at least in the hotel industry. Is the entire hotel industry now in play? What the experts have to say.

Author of www.HotelLawBlog.com
29 January 2007Hotel lawyer on private equity investments in the hotel industry. In my most recent article, I talked about two deals that could profoundly affect the very makeup and direction of the hotel industry. (See, “Two deals that may change the lodging world forever“). Of course, these two transactions are the leveraged buyouts of Equity Office Properties (EOP) and CNL Hotels & Resorts (CHL).

Here’s why size may no longer impose any limit on acquisitions. . . and why Marriott, Hilton, Starwood, and all the other hotel companies could be up for grabs.

How could this be? Here’s how and why.

The short answer is that the lodging industry has experienced record profit growth the past three or four years, and cap rates — although near historic lows for the hospitality industry — still look very attractive compared to other real estate types and other industries.

There are almost unlimited amounts of capital looking for a “home” or place to invest. And the private equity capital is now being put together in amounts previously unimaginable. This is discussed in some detail in my prior posting (“Two deals that may change the lodging world forever“).

But to better understand this and the implications for our hospitality industry, I talked with John V. Arabia, a Principal of Green Street Advisors, an independent research firm concentrating exclusively on the securities of publicly traded real estate companies, including both hotel REITs and C-Corps. John Arabia is one of the best known and most highly respected analysts covering lodging, and he has written many research reports on individual companies as well as industry trends and topics.

John says that until recently, the larger hotel companies, including both the large hotel C-Corps and REITs, were generally considered too big to be acquired by private equity firms despite their strong interest in the lodging sector.

But John now says, “This situation has more than likely changed in light of the recent bidding war for Equity Office Properties between Blackstone and a group led by Vornado Realty Trust. Blackstone’s most recent all-cash offer of $54 per EOP share translates into a total enterprise value of $38.3 billion, including debt, and would be the largest private-equity buyout in history.”

By comparison, the largest hotel C-Corps — such as Starwood, Marriott and Hilton — each have total enterprise values ranging from “only” $18 to 30 billion, while Host Hotels, the largest hotel REIT, has assets valued at roughly $20 billion.

While size may matter to some, size no longer seems to be a deterrent to taking the large public hotel companies private given the flood of capital currently being raised by private equity firms.

Hotel privatization is likely to continue or accelerate.

OK. So the private equity guys could buy hotel companies if they wanted to. But why would they bother?

The answer is that hotel companies and hotel properties appear to be a bargain to private equity investors.

John Arabia describes this as “the current disconnect between public and private pricing for hotel real estate.” John notes that on average, public hotel REITs have recently traded at high-single-digit to low-double-digit discounts to Net Asset Value (NAV). That means that private-market hotel buyers are willing to pay more for properties than institutional investors in public hotel REITs. That is likely to lead to more private equity leveraged buyouts.

Last week at ALIS (the Los Angeles hotel investment conference), Christopher J. Nassetta, President and CEO of Host Hotels & Resorts, said it slightly differently. Commenting on the CHL and EOP transactions, he said, “There is a fundamental mismatch of valuations in public and private markets. You are seeing transactional activity that rationalizes this mismatch.”

And Jacques E. Brand, Managing Director & Co-Head of Corporate Finance, Deutsche Bank, commented that “The capital markets have grown more sophisticated over the years as relates to lodging and gaming. Lodging and hospitality will raise more money because markets are getting more comfortable with the industry, management and performance.”

Nassetta also noted that there are much higher pension allocations to lodging now. Pension fund money is more “sticky” than other capital. It is not permanent, but it may take years to increase or decrease allocations to real estate and lodging.

Monty J. Bennett, President and CEO of Ashford, just raised $2.4 billion to buy a 51-hotel portfolio from CNL hotels says, “The public is now accepting different plays. . . different kinds of companies. We could not have raised our money 10 years ago.”

Monty calls the deal a “transformational investment” for Ashford. And what a deal! The price per key was $177,000 per room on average, and $215,000 per room for some great select service properties. Monty says, “We think we bought at about a 7 cap rate on a trailing basis. It also improves the quality of our already great portfolio.”

Where does it lead? Where does it stop?

So if Ashford — a great company, but not previously regarded as a “giant” — can raise $2.5 billion to buy 51 hotels as part of a $6.6 billion buy out of CNL . . . and if Blackstone or Vornado can raise more than $38 billion to buy EOP, what are the limits?

Well, Starwood Capital’s CEO, Barry Sternlicht, said it in plain English: ” We will see more privatization in the next 12 months. There is no barrier of size anymore. Everyone is in play.” He added, “There is a lot of money in the Gulf States.” (And he meant the United Arab Emirates, not the states on the Gulf of Mexico!) In fact, he put the trend in global perspective when he said, “Because of the foreign exchange rates, the United States — the whole country — is ‘on sale.’ It’s a 30% off shopping spree for foreign investors.”

In my last posting (“Two deals that may change the lodging world forever“), I noted that some experts now think even $100 billion companies could be bought in leveraged buy outs. There may be no limits, or as some would say, “Size does not matter any more . . . at least in private equity buy outs.”

As always, Laurence S. Geller, President and CEO of Strategic Hotels & Resorts (now an NYSE REIT), has a unique way of summing up the sea change in private equity buyouts and its implications. At the Los Angeles ALIS conference, Laurence said, “Size is not everything. It is just performance!”
Well said, Laurence! All investors seek performance and the private equities have noticed the stellar performances of many of our industry’s star players. This should be a very interesting year for our industry, to say the least.

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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.

About the Authors

Jim Butler

Jim Butler is recognized as one of the top hotel lawyers in the world. He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of seasoned professionals with more than $71 billion of hotel transactions, involving more than 3,800 properties located around the globe.
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Robert Braun

Robert Braun is a partner in JMBM's Corporate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Bob represents owners in both transactional and operational issues. He advises clients with respect to business formation, financing, mergers and acquisitions, venture capital financing, joint ventures and strategic partnerships. He has represented hotel owners in the negotiation of several hundred management agreements, as well as spa management and franchise agreements. Bob also advises hotel owners regarding telecommunications, software, internet, e-commerce, data processing and outsourcing agreements. To read Bob's articles, go to www.HotelLawBlog.com and select "Management Agreements." For more information, please contact Bob Braun at 310.785.5331 or rbraun@jmbm.com.

Marta Fernandez

Marta Fernandez is a partner in JMBM's Employment and Labor Department and a senior member of JMBM’s Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. As a management labor lawyer with more than 20 years of experience, Marta specializes in representing hospitality industry clients in all aspects of labor and employment including labor-management relations such as union prevention, collective bargaining for single as well as multi-employer bargaining units, neutrality agreements and defense of unfair labor practice charges before the NLRB. She defends employers in administrative and litigation claims, such as employee claims of sexual harassment and discrimination and counsels clients in preventative strategies such as executive training, arbitration enforcement, and policies and procedures. To read Marta's articles, go to www.HotelLawBlog.com and select "Labor & Employment." For more information, please contact Marta Fernandez at 310.201.3534 or at mfernandez@jmbm.com.

Guy Maisnik

Guy Maisnik is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Guy's deep and broad transactional practice includes complex real estate finance and venture capital transactions, including project finance, commercial finance, leveraged leasing and real estate acquisitions. He assists clients with development, leasing and disposition, loan portfolio acquisitions, loan and debt restructure, workouts and real estate exchanges. Go to www.HotelLawBlog.com for current information in these areas. For more information, please contact Guy Maisnik at 310.201.3588 or mgm@jmbm.com.

David Sudeck

David Sudeck is a Partner in JMBM's Real Estate Department and a senior member of JMBM’s Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. David has significant experience in the vacation ownership arena, focusing on the formation and registration of condominiums, timeshares and fractional interest regimes. He negotiates hotel, spa and restaurant management agreements, and assists client in the development, acquisition, sale and leasing of hotels, golf courses and restaurants. For David's take on current issues in the timeshare arena, go to www.HotelLawBlog.com and click on the topic, "Timeshare." For more information, please contact David Sudeck at 310.201.3518 or dsudeck @jmbm.com.

Robert Kaplan

Robert Kaplan is a partner in JMBM's Bankruptcy, Insolvency and Restructurings Group and a senior member of the Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Bob represents lenders, special servicers, hard money lenders, community banks, national banking associations, distressed debt investors, and equity investors, positioning them for the best possible outcome by acting expeditiously to preserve value and increase cash flow. His industry experience and his knowledge of the current capital markets -- where distressed assets often include complex deal structures and securitized loans -- allows him to bring creative and effective strategies to the table. When aggressive litigation is the best strategy, he is a vigorous and effective advocate for his clients. Bob represented the securitized lender in the Chapter 11 bankruptcy case filed by the Clift Hotel in San Francisco, and in the subsequent negotiations and successful sale of the loan to a third party. The lender -- acting by and through GMAC Commercial Mortgage Corporation as special servicer -- was the holder of a $60 million loan secured by a Deed of Trust on the Clift Hotel. He has also served as counsel to CapMark, J.E. Robert Company, Inc., AMRESCO Management Inc. and Midland Loan Servicer in their capacity as special servicers on troubled hotel loans in CMBS pools. For more information, contact Robert Kaplan at 415.984.9673 or rkaplan@jmbm.com.

Martin Orlick

Martin Orlick is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Marty specializes in representing hospitality industry clients in Americans With Disabilities Act (ADA) compliance and defense. He has represented more than 500 businesses in ADA issues, many of them hotels and restaurants, as well as hotel mixed-use properties. Marty is a member of the American College of Real Estate Lawyers (ACREL) and a frequent speaker on the ADA and other topics. To read Marty's articles, go to www.HotelLawBlog.com
and select "ADA." For more information, please contact Marty Orlick at 415.984.9667 or morlick@jmbm.com.

James Abrams

James Abrams has significant experience in government affairs at the national level, the state level – including the California Legislature and scores of state agencies – and with local governments and agencies. He has authored successful ballot measures and scores of bills for his clients. Jim served as the President and CEO of the California Hotel & Lodging Association from January 1, 1991 through December 31, 2008 and is currently an adjunct professor in the Hospitality Industry Management Program at the University of San Francisco. He is a frequent speaker and writer on all aspects of the law relating to the lodging and hospitality industries, and he is the author of the book Laws Pertaining to the California Innkeeper, which is published by the California Hotel & Lodging Association. To read Jim’s articles, go to www.HotelLawBlog.com. For more information, please contact Jim Abrams at 415.398.8080 or jabrams@jmbm.com.

Scott Brink

Scott Brink is a senior member of JMBM's Global Hospitality Group® and a partner in JMBM's Labor & Employment Law Department. Scott is a management labor lawyer with more than two decades of experience representing employers in all aspects of labor relations and employment law including union prevention, collective bargaining negotiations, defense of unfair labor practice charges before the NLRB, wrongful discharge litigation, individual and class action employment discrimination and wage-and-hour claims, sexual-harassment litigation, arbitrations, personnel policies, California wage and hour law, and employee discipline and discharge. An experienced trial attorney, Scott has litigated a number of high-profile and complex cases involving a wide range of labor and employment law matters. For more information, contact Scott Brink at RSB@jmbm.com or 310.785.5365.

Travis Gemoets

Travis Gemoets is an experienced trial attorney and represents management in all facets of labor and employment law, including wage/hour class actions, claims of discrimination, harassment, wrongful termination, trade secrets and unfair competition, union/management relations and workplace violence. He is a member of JMBM's Global Hospitality Group(r), in which capacity he negotiates union contracts and resolves labor disputes throughout the country, defends class action claims, develops strategies for the mass onboarding and separation of employees, and recommends proactive changes to employers' policies and practices in order to minimize potential liability risks. Reach him at 310.785.5387 or tgemoets@jmbm.com.

Mark S. Adams

Mark S. Adams is an experienced trial lawyer and a member of JMBM's Global Hospitality Group® and Chinese Investment Group™. He focuses his practice on business litigation including contracts, corporate and partnership disputes, and hospitality disputes and litigation. On behalf of hotel and resort owners, Mark has successfully litigated the termination of long-term, no-cut, hotel management agreements, franchise agreements, fiduciary duty issues, investor-owner disputes, TOT assessments, and more. He has wide-ranging trial experience in a variety of commercial disputes, including complex multi-party litigation and class actions. He has tried numerous cases in state courts, federal courts, and in domestic and international arbitrations, and is a frequent author and speaker on trial practice. Mark's trial wins have been covered by Forbes, Reuters, and other publications. He has obtained two of California's annual 50 largest jury verdicts in the same year. Mark has taken or defended nearly 1,000 depositions throughout North America, Europe and the Middle East. He has been quoted as an expert on noncompete agreements in the Wall Street Journal. For more information, contact Mark at 949. 623.7230 or markadams@jmbm.com.

Jeffrey Steiner

Jeffrey Steiner is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. He represents both institutional lenders and borrowers in connection with construction and permanent lending, loan work outs and restructurings, real estate development, design and construction contracts, real estate acquisitions and sales, preparation and negotiation of commercial leases on behalf of landlords and tenants, joint venture transactions and hotel management agreements, purchases and sales and financings. For more information, please contact Jeff Steiner at 310.201.3514 or jsteiner@jmbm.com.

Bennett Young

Bennett Young is a partner in JMBM's Bankruptcy, Insolvency and Restructurings Group and a senior member of the Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. His clients include lenders, financial institutions, secured and unsecured creditors, distressed investment funds, businesses, receivers, special servicers and creditors' committees. Ben represented the owner of a partially completed multi-billion dollar resort property in the restructuring of its finances and has represented lenders to hotels and casinos. For more information, contact Ben Young at 415.984.9626 or byoung@jmbm.com

Sheri Bonstelle

Sheri Bonstelle is a partner in JMBM's Government, Land Use, Environment and Energy Department, and a member of JMBM's Global Hospitality Group®. She represents owners and developers in land use, zoning, environmental, litigation and construction matters. She manages all aspects of the entitlement process, including representing clients before local and state agencies, commissions and councils. Sheri also represents clients in a variety of land use and real estate litigation matters in state and federal courts, including cases arising under CEQA and other environmental laws. Her hotel experience includes handling the adaptive reuse of an historic office building as a luxury boutique hotel. For more information, please contact Sheri Bonstelle at 310.712.6847 or SBonstelle@jmbm.com.

Kevin McDonnell

Kevin McDonnell is a partner in JMBM's Government, Land Use, Environment and Energy Department, and a member of JMBM's Global Hospitality Group®. Kevin represents developers and owners of hotels in a broad range of land use and zoning issues including entitlements, code enforcement, easements and parking requirements, as well as related Parcel Map and Tract Map subdivision issues. His hospitality experience includes hotels, condo-hotels and mixed-use projects. A registered Civil Engineer and Structural Engineer in California, and a former building official for the City of Los Angeles, Kevin brings unique experience and insight in Zoning and Building Code applications and Code Enforcement issues. For more information, please contact Kevin McDonnell at 310.201.3590 or kkm@jmbm.com.

Joyce Men

Joyce Men is a business lawyer, an associate in JMBM's Corporate Department, and a member of the Global Hospitality Group(r). Her practice focuses on business transactions including mergers and acquisitions, financing, and acquisitions and dispositions. She serves clients in a variety of industries including manufacturing, hospitality, media, telecommunications, and renewable energy. Joyce also assists clients as outside general counsel, providing guidance on corporate legal matters. For more information, contact Joyce Men at JMen@jmbm.com or 310. 201.3549.

Jon Welner

Jon Welner is a partner in JMBM's Government, Land Use, Environment and Energy Department and a senior member of JMBM's Global Hospitality Group®. He is also the chair of JMBM's Prevailing Wage Group, which advises and defends developers on the most challenging and complex prevailing wage matters in California. California's Prevailing Wage Law has become a tool for workers to demand union wages on virtually any construction project in the state. These claims can increase the cost of a major construction project by millions of dollars-and can be brought years after construction is complete. For more information contact Jon Welner at 415.984.9656 or JWelner@jmbm.com.

Jamie Ogden

Jamie Ogden is a tax lawyer at Jeffer Mangels Butler & Mitchell LLP. He advises individuals and businesses on a range of tax planning, tax controversy and estate planning matters. He serves as lead tax counsel on M&A transactions, financing, internal corporate restructurings and deferred compensation matters. Jamie also works frequently with litigators on the tax aspects of litigation, judgments and settlements. Jamie has extensive experience with foreign compliance matters, including each variation of the IRS amnesty programs. In addition to his experience in private practice, Jamie also brings several years of service from both state and federal government. For more information, contact Jamie at JOgden@jmbm.com or 310.201.3510.

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Ask The Hotel Lawyer ™

Ask the Hotel Lawyer™ is a quarterly column that I write for JMBM's Global Hospitality Advisor®. If you have a question you would like to submit to Ask the Hotel Lawyer™ please use the comments box below. While your question may not be of sufficient general interest for the column, I will try to respond to you individually if you leave your contact information below. Jim Butler.